Emerging markets saw $26.3 billion in outflows in September on hawkish Fed

The outflows were primarily driven by a hawkish stance from the US Federal Reserve, which raised interest rates and indicated ongoing concerns about inflation. This policy shift led to a significant increase in US Treasury yields and a strengthening of the US dollar, prompting investors to pull back from riskier assets.

Specifically, non-resident investors removed $7 billion from emerging market fixed income in September, the first net outflows since March. The report noted that pressure built in the latter half of the month, with hard currency bond funds experiencing outflows in the week of the Federal Open Market Committee (FOMC) decision, leading to wider EM dollar credit spreads.

Heavy foreign selling of South Korean stocks contributed significantly to the outflows, accounting for $19.2 billion of the total $26.3 billion outflow from emerging market equities in September, the IIF found.

The IIF outlook suggests that continued hawkishness from the Fed, coupled with tightening monetary policy across advanced economies, including the Bank of Japan reaching its highest policy rate since 1995, will create a higher hurdle for emerging market carry trades into the fourth quarter.